Whenever I’m extremely bullish on a stock (see my memo from yesterday
), I like to think through the bear case as well.
Stocks are inherently risky, and earning a return is never a sure thing. That’s why there’s a “risk premium” with stocks, because you very well could lose your money. Here are the reasons why Square could fall flat on its face.
(Animation Credit: Me, created in Sketch and giphy)
- Shares have more than quadrupled since March
- The stock has outpaced fundamentals
- The stock has already done an 18x since it went public at $9 in 2015. You missed it.
- From here on out it’s higher risk and lower reward.
Too Much Hype
- Ideas about what Square could be in the future are over-emphasized. Execution in the now is what matters.
- Gross Payment Volume ($22.8 billion in the second quarter) is 15% below the second quarter of 2019.
Too Much Competition Now
- PayPal’s Venmo is more popular than the cash app for consumer to consumer payments.
- The online payment processing space is filled with competitors: Stripe, Adyen, Braintree, Shopify, Shopkeep, Lightspeed, there are a lot more.
Too Much Competition in the Future
- Visa or MasterCard could leverage their data and scale to start offering similar consumer lending products as the cash app.
- Apple could come out of nowhere and partner with a bank and start offering financial services. They would immediately have scale and own distribution. Apple pay has been chugging along well. This could happen.
Too Much Pain
- Square’s seller ecosystem is made up of small and medium sized businesses, many of which are suffering right now and won’t open back up after the pandemic.
- Square's loan book is not looking good either. In March they had to completely suspend facilitating loans to sellers other than Government PPP loans. Thats not good for a segment that has historically been a significant component of Square's subscriptions and services revenue.